Chinese President Xi Jinping’s vision of transforming China into a global football powerhouse is materialising. Since he announced a 50-point plan in 2015 to create a US$813 billion sports industry in the country, businesses have been pumping billions into football to bring the sport up to par with European clubs.

This has not just attracted big name players to sign on with the Chinese Super League. Famous clubs such as English Premier League giants Liverpool are capitalising on the sport’s growing popularity in China to boost their commercial revenue through merchandise sales as well.

Despite the market potential and strong Chinese interest in European football, driving revenue from merchandise sales is not as straightforward as it sounds.

Liverpool is struggling to compete with the rampant counterfeit market in which consumers can purchase similar shirts at a fraction of the cost

So, what’s the problem? Quite simply, Liverpool is struggling to compete with the rampant counterfeit market in which consumers can purchase similar shirts in sporting goods stores and from online platforms at a fraction of the cost.

Liverpool is not alone. Popular brands such as Puma, Pandora and Prada may span various product categories, but they have one thing in common – they are all susceptible to the counterfeit market. Pandora, the Danish jewellery company, has a brand protection team that has twice taken down a lookalike website selling imitations from China. However, once a site has been shut down, it often pops up again on another Internet service provider.

According to research by Global Financial Integrity, the international market for copycats is huge. In their March 2017 report, the value of global trade in counterfeit and pirated goods was estimated to be between US$923 billion and US$1.13 trillion annually. In fact, a recent UN report suggests that 70 per cent of all fashion and luxury copycat merchandise is produced in China.

Copycats are popular because they confer upon consumers the social status associated with luxury goods without the high price tag. In our joint study on counterfeits at the National University of Singapore Business School, we had three observations as to why copycats are more likely to successfully enter the marketplace.

A recent UN report suggests that 70 per cent of all fashion and luxury copycat merchandise is produced in China

First, fakes usually bear a strong resemblance to the original item but are of far lower quality. Shanzhai – a Cantonese slang term for low-end, ill-equipped factories that usually produce imitation goods – are mindful that by producing better quality copycats, they run the risk of encroaching on the profits of genuine brands. If they maintain a lower quality, the impact on genuine brands is low and those real brands “tolerate” their presence. By maintaining this poor quality, Shanzhais also avoid attracting the type of attention that results in calls for enforcement of anti-counterfeit measures.

Second, regardless of whether a copycat actually enters the market, the mere threat is sufficient to force luxury brands to lower the prices of their genuine goods.

In Liverpool’s case, the club recently cut the cost of its latest shirt from US$87 to US$30, in an attempt to convince Chinese consumers to buy its official merchandise. While the low-cost shirt may look similar to the official jersey, it is redesigned with simpler materials and is not made by the club’s official sponsor, New Balance.

Even luxury brands have adjusted their prices to contend with the counterfeit and grey markets. While it did not offer a cheaper version of its most sought-after bag, Chanel in 2015 aligned global pricing across Asia and Europe to regain control of its brand image. Other luxury houses such as Prada, Cartier and Burberry followed suit.

In spite of the discount, brands will find it difficult to compete with the fake that looks similar but costs much less. Liverpool’s price-cut risks a potential backlash from UK fans who are already unhappy with the high price they have to pay.

That leads to our final observation on the impact of counterfeits on consumers’ social status. While counterfeits do not measure up to the real thing, consumers still buy them because they offer the opportunity to gain a higher “social status,” as long as they are not discovered. In the event that they are found out, they may be humiliated or shunned by their peers.

The ubiquitous counterfeit market has forced luxury brands to rethink their strategy in China

The ubiquitous counterfeit market has forced luxury brands to rethink their strategy in China. As a response to market demands, brands have either resorted to creating a genuine copycat, if you will, of its product and/or lowered the cost by more than half to break into the Chinese market.

Whether such a strategy will be successful remains to be seen. However, based on experience, Shanzhais are innovative enough to keep genuine brands on their toes as they continue to reinvent their business model to stay ahead of the business and the law.

This vicious cycle is likely to continue unless there is stronger law enforcement to crack down on counterfeits. Even now, many firms in China and other developing countries are able to produce and sell imitation products because of efficient supply networks, inconsistent law enforcement and large underserved markets.

Lim Wei Shi is associate professor of marketing at the National University of Singapore Business School where Sarah Gao Yini is a PhD student in analytics and operations. Christopher Tang is university distinguished professor and Edward Carter professor of business administration at the UCLA Anderson School of Management